Financial Overhaul Passed

The bill draws clearer jurisdictional lines in financial regulation while reducing the number of agencies involved, consolidates consumer protection functions in an independent agency within the Federal Reserve, imposes more regulation on the kinds of transactions that were at the heart of the financial crisis (like secret derivative transactions and hedge fund investments owned by banks trading on their own accounts), gives regulators greater room to prevent institutions from becoming "too big to fail," and creates FDIC-like authority to resolve the affairs of non-FDIC regulated financial institutions. The bill also gives member banks a smaller say in selecting Fed officials who have the power to make public policy. And, in a notable move regarding corporate governance of public companies it give shareholders a greater ability to nominate directors and have a non-binding say in CEO pay.

Some key provisions governing how bond rating agencies are selected designed to reduce conflicts of interest in the process, limitations on leverage in large financial institutions, and oversight authority over new financial structures, were deferred to the regulatory process. Automobile dealer financing was exempted from the consumer regulation package. Intense lobbying over those implementing regulations, which are already being drafted, is underway.

The bill permanently exempt companies with less than $75 million in market capitalization from having to comply with the Sarbanes-Oxley Act's Section 404(b) auditor attestation requirements.

This adds a major legislative accomplishment for the President to already passed health care reform, various stimulus bills, a U.S. Supreme Court appointment. President Obama's second U.S. Supreme Court nomination, Elana Kagan, is likely to be approved before the next election.

The bill continues a trend in which Democrats have passed major legislation on a largely partisan basis, with the Republicans acting as "the party of no." Just three Senate Republicans (Scott Brown of Massachusetts, Olympia Snowe of Maine, and Susan Collins of Maine) joined Senate Democrats in defeating an attempt to filibuster the legislation. But, the GOP strategy has had few legislative success so far other than blocking an extension of unemployment benefits.

1 comment:

Useful detail is added here. The details are less vapid than summaries of the bill might suggest.

With regard to resolution authority:

"The bill establishes an intricate series of provisions to place ailing financial institutions and systemically significant nonbank financial companies into receivership (Title II). The bill also has provisions allowing the government to deal with systemically significant foreign firms and foreign financial subsidiaries of American companies (Sections 113 and 210). . . . The bill requires that in any resolution, senior management is placed farther down the line of creditors of the firm than they would in a normal bankruptcy (they are placed after the unsecured creditors and just before shareholders) (Section 210). The bill also allows the government to break financial contracts, like credit default swaps, in the resolution process (Section 210). These two provisions allow the government to avoid an A.I.G.-type situation where it is forced to hand over collateral under these derivatives contracts or otherwise pay out money to undeserving management."

Can a similar reshuffling of priorities in bankruptcy be far away?

With regard to derivatives:

"The Securities and Exchange Commission and the Commodity Futures Trading Commission can regulate and ban abusive derivatives as well as decide which derivatives are required to be cleared [through a regulated exchange] (Section 714). Nonfinancial companies do not need to clear derivatives if there is a commercial reason for the transaction and they notify the S.E.C. of their ability to financially meet the obligation (Section 723)."

And, with regard to bank capitalization and size:

"The bill requires that bank holding companies be “well-capitalized and well-managed” (Section 606). In addition, the bill requires that the Federal Reserve and other bank regulators adopt counter-cyclical capital requirements for their regulated bank institutions (Section 616).

In addition, bank holding companies with assets exceeding $50 billion and systemically significant nonbank financial companies can be required to have convertible contingent equity (Section 165) and banks generally can be subject to higher capital requirements if their activities pose a risk to the financial system (Sections 120). Short-term lending in the form of repurchase agreements is also limited (Section 610) — this is the type of lending that caused trouble for Bear Stearns and Lehman. . . .

the bill does impose costs on financial firms for getting bigger, including greater capital and leverage requirements and reporting requirements (Section 165). The Federal Reserve can even effectively break up institutions with assets greater than $50 billion (Section 121). The bill also imposes a hard 10 percent limit on assets by market share for a financial company merger and allows for the Federal Reserve in its final rules to impose a greater or lower cap (Section 622)."

And with regard to arbitration:

"The S.E.C. . . . is . . . given the power to end mandatory arbitration between brokers and their customers (Section 921)."